Area Economy

Economy picking up steam, but long-term outlook dims

November 15, 2013
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Still growing slowly, but a tad faster than last month. That’s the latest word on the West Michigan economy, according to the data collected during the last two weeks of October.

New Orders, our barometer of future growth, rose to +15 from September’s +6, and considerably more optimistic than August’s -4. The Production index followed the same pattern, advancing to +13 from +2. Unfortunately, the Employment index flattened to 0 from +10. Local employers continue to complain that qualified applicants are not available. Fortunately, industrial inflation, our index of Prices, tells us both the pricing and excessive speculation for industrial commodities are not problems.

For the new “outlook” statistics we began collecting last month, the Short-Term Business Outlook Index rose to +17 from +12, despite all of the negative wrangling in Washington. However, the Long-Term Business Outlook Index backed down considerably to +46 from +64. One local observer pointed out that the recent shutdown shows Washington is “broken” and there is little hope for fixing it over the next couple of years. Hence, the five-year outlook may be a little more unpredictable.

Turning to local industrial groups, the resurgence of auto sales has resulted in some new quoting opportunities for local auto parts suppliers. Optimism is growing over the 2014 model year. The office furniture firms reported a slight uptick in activity in October, but the reports from the industry’s Tier I suppliers and some of the smaller firms were flat. For industrial distributors, the reports were mixed. Reports from capital equipment firms were generally positive. Overall, most industrial groups remain stable.

At the national level, the Nov. 1 report from the Institute for Supply Management, our parent organization, reported New Orders for ISM’s manufacturing index retreated slightly to +12 from +17. However, the Production index remained virtually unchanged at +14, down from +15. ISM’s Employment index is firmly stuck in single digits and eased to +5 from +6.

When all of these numbers are added together in a composite model, ISM’s overall manufacturing index edged up very slightly to 56.4 from 56.2, and its overall non-manufacturing index rose to 55.4 from 54.4. The numbers lead us to conclude that slow growth continues at the national level.

As always, a contrasting view of the U.S. economy comes from Markit.com, the British economic forecasting firm. Markit’s composite manufacturing Purchasing Managers Index for October dropped to a one-year low of 51.8, down from 52.8. Although still positive, the Markit index has definitely flattened to a very slow growth rate. The downtick can be attributed to weaker results from the indexes of New Orders, Production and Purchases. One bright spot came from New Export Orders, which rose to 51.3 from 49.

JP Morgan’s 32-nation Global Manufacturing PMI edged modestly higher to 52.1 from 51.8. Looking at some of the 32 countries that compose the JPM index, HSBC’s China Manufacturing PMI rose to 50.9 from 50.2. With China being our third-largest customer, even modest improvement is good news. For Brazil, HSBC’s Manufacturing PMI flipped to positive at 50.2, up from 49.9. An unusually strong report came from Canada, where the Royal Bank of Canada’s PMI bounced to a 30-month high of 55.6 from 54.2. Canadian businesses have been able to take advantage of the low worldwide interest rates.

For U.S. exporters, Europe is still a problem because about 6 percent of our GDP comes from exports to Europe. The PMI for the Eurozone rose to a modest 51.3, up from 51.1. Recent forecasts have indicated many economists now expect this same pattern of very slow European growth to continue for some time. Since the recovery, the strongest countries that have emerged from the Euro crisis are Ireland and the Netherlands, where low corporate tax rates and a big recruiting effort have successfully lured new domestic and foreign investments. For instance, a few weeks ago we heard that Perrigo was moving the corporate headquarters to Ireland. In addition, Austria, Germany, Spain and even Italy are now posting positive PMIs. On the down side, the French PMI for October contracted at the fastest rate in four years.

Greece remains negative, and the PMI has worsened slightly for the past three reports. When assessing Greece, keep in mind about 20 percent for the capital base has left the country, 25 percent of the GDP has been lost since 2008, and the unemployment rate is stuck at about 28 percent. For young people, unemployment is 58 percent. The Greek government reported that industrial production dropped 7.2 percent in August from the same month a year earlier. In short, the Greek tragedy is not yet over, although some Greek assets are getting so cheap that money from northern Europe is starting to buy up real estate for pennies on the euro. The austerity program has helped stop the run-up of government debt, and some estimates claim GDP might turn back to positive in 2014.

Reversing last month’s trend, the monthly report for automotive sales flipped back to positive. The U.S. year-over-year sales rate rose to 10 percent, up considerably from the -4 percent reported for September. General Motors led the Detroit Three, gaining 16 percent. Ford added 14 percent and Chrysler gained 11 percent. For the transplants, Honda gained 7 percent, Nissan was up 14 percent and Toyota rose 9 percent. However, the seasonally adjusted SAAR rate declined to 15.2 million units from September’s 15.3 million. A SAAR rate of about 15 million is more in line with an optimal and sustainable rate of growth. Overall, auto sales have grown by 8 percent so far in 2013, far ahead of industry forecasts a year ago.

At our last report, Obamacare had just begun. Aside from a malfunctioning website and political pushback, the economic implications are starting to surface. Locally, our smaller firms are scared by the complexity of the new requirements and new taxes. Hence, they are not hiring or expanding as they should. Consumer confidence in government has taken a hit, since even those who planned to join the new program are discovering that what is available is actually very different from what was expected. However, the biggest hit may come from the supply side, wherein a recent study predicts that approximately 10 percent of physicians plan to drop out of the direct care business.

Last but not least, the government shutdown is now over, and as we suspected, the Michigan economy was virtually unaffected. The bad news, of course, is that the agreement only kicked the proverbial can down the road for another three months. With everyone just catching their breath, it is daunting to imagine the negative impact of the next confrontation. The January resolution may be reached without a shutdown, but it seems obvious such an agreement will do little to solve what the Congressional Budget Office calls an “unsustainable level of debt growth.” Short run, there will be little impact of continued budget deficits. Long term, disaster is almost certain. Our European version serves as an example: The Greek economy collapsed within about 18 months following a global realization that the Greek national debt could not be repaid. Furthermore, the problem was getting worse every year with no end in sight. What is sad is that most of the Greek electorate thought that the whole problem was just “politics,” and that somehow the government would “do the right thing” and come up with a solution that would put the country on a path back to the economy of 2007. Now they know the sad truth.

Brian Long, Ph.D., is director of supply chain management research at Seidman College of Business, GVSU.

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